By Ellen Hazen, CFA®, Chief Market Strategist
What We’re Watching in September
AI spending is becoming a macroeconomic variable. Artificial intelligence investment is no longer a technology-sector story. The rapid expansion of datacenter spending is supporting capital investment and corporate earnings, but it is also increasing financing needs and placing pressure on power, construction, and semiconductor supply chains. For now, resilient growth and positive earnings revisions remain supportive of equities. Persistent inflation, higher interest rates, and greater use of debt make the durability of that support worth watching.
Hyperscaler capital spending on artificial intelligence has continued to increase. Currently, the four largest hyperscaler companies – Meta, Amazon, Alphabet, and Microsoft – are expected to increase capital spending by 110% over 2025 to $750 billion, increasing by another 36% in 2027 to over $1 trillion. Because Alphabet, Amazon, and Meta can no longer fund this capital spending solely out cash generated from operations, they’ve issued debt: Meta’s debt has increased from $50 billion a year ago to $112 billion today, while Amazon’s debt has increased from $152 billion a year ago to $242 billion today. Even with this higher debt, all four companies maintain very strong balance sheets, reflecting their highly profitable core business models.
In 2026, $750 billion of hyperscaler capital spending equates to approximately 2.4% of US GDP of $31 trillion, and over 8% of all US capital expenditures.
The broader backdrop remains supportive
Equity markets have been supported by earnings growth. S&P 500 second quarter earnings growth of 51% was well ahead of analyst estimates. That headline figure was amplified by unusually large gains at Alphabet and Amazon, but earnings results excluding those effects also remained strong. 2026 is shaping up to be another strong earnings year, with ~25% growth. During August, large-cap equities (S&P 500 Index +2.7%) outperformed small-cap (S&P Small cap 600 Index -0.6%) and mid-cap (S&P Midcap 400 Index +0.2%) equities, although on a year-to-date basis large-cap is underperforming, at +13.1% compared to +14.7% (midcap) and +20.9% (small cap).
Earnings estimates for 2026 and 2027 increased by another 2.5% just during the month of August, with positive revisions across nine of the eleven S&P sectors. Because estimates have increased so much, the forward 24-month price-to-earnings ratio for the S&P 500 is actually lower than it was at the beginning of the year: it’s declined from 19.4x to 16.9x, and currently stands a touch below its 10-year median of 17.3x.
US economic growth is still resilient. US GDP is likely to grow approximately 2.1% in 2026. The Atlanta Fed’s GDPNow indicator estimates that Q3 will be very strong at 4.8% growth. For reference, Q1 was 2.1% and Q2 was 1.5%. (All quarterly numbers are Q/Q annualized and seasonally adjusted). According to Bloomberg estimates, the US has much higher GDP growth than Japan (+0.7%) and Europe (+0.8%). Emerging market GDP is higher, which in turn is driving much higher corporate earnings growth. For example, Bloomberg consensus estimates call for Taiwanese earnings growth of 30% next year and Korean earnings growth of 35%.
The labor market remains solid, despite slower labor force growth. August nonfarm payrolls of 162,000 was notably higher than expectations of only a 55,000 increase, while the unemployment rate remained flat at 4.1%. According to Challenger Gray & Christmas, monthly private sector layoffs are averaging 63,000 in 2026, well below 2025’s average of 100,000. In terms of job openings, there are 7.2 million job openings, and the private sector hired just over 5 million last month. The continued excess of openings over hires suggests that labor demand has moderated but not collapsed.
Economic growth is broadening beyond just technology. We expect US large-cap earnings to continue to grow double digits in 2027, with breadth across multiple sectors, including technology but also consumer, healthcare, industrials, and materials.
The tension: inflation, rates, and credit
Inflation has not yet declined. The consumer price index (CPI) was most recently 3.4% and the personal consumption expenditure core price index (PCE) was most recently 3.3%. These are both well above the Fed’s 2% target. This makes the Fed’s and Treasury’s job more complicated. Persistent above-target inflation strengthens the case for restrictive monetary policy, while the fiscal cost of higher rates creates political pressure for lower long-term yields: because interest expense is now over 13% of federal expenses (up from 8% pre-COVID), Bessent would like lower interest rates.
Interest rates have been increasing. The yield curve has shifted higher in 2026 and that continued in the month of August, supported by Federal Reserve chair Kevin Warsh’s hawkish speech at the Jackson Hole symposium. Currently, futures markets are pricing in a 60% probability of an interest rate increase at the Fed’s September 16 meeting. In mid-August, Treasury Secretary Scott Bessent tried to lower longer-term Treasury yields by announcing that Treasury would buy long bonds while issuing short bonds. After an immediate ~0.10% decline, markets reversed course and the 10-year yield ended the month slightly higher than it began.
Credit markets are sanguine. Credit spreads remain very tight, with 10-year BBB bonds only 1.5% above comparable Treasury bonds, suggesting that credit markets are pricing in limited default risk.
The environment is supportive, but the margin for error is narrowing. Resilient growth, positive earnings revisions, and broadening sector participation support our constructive view of US and emerging-market equities. At the same time, the growing scale and financing requirements of AI investment make the durability of that cycle increasingly important. We are watching for negative earnings revisions, slower GDP or employment growth, widening credit spreads, further material increases in interest rates, and evidence that datacenter construction is being constrained by financing, power, supply chains, or local opposition.